The Short-Run Effects of Time-Varying Prices in Competitive Electricity Markets


Stephen Holland and Erin T. Mansur

The Energy Journal, Volume 27, Issue 4, October 2006, pages 127-155.
Working paper, May 2006.
UCEI CSEM Working Paper-143r, May 2005, Revised May 2006.
Previously titled: “The Distributional and Environmental Effects of Time-Varying Prices in Competitive Electricity Markets”
SSRN Yale SOM Working Paper No. ES-42 (abstract number 738585), May 2005.




We analyze the efficiency, distributional, and environmental effects of real-time pricing (RTP) adoption in the short run. Consistent with theory, our simulations of the PJM electricity market show that RTP adoption improves efficiency and compresses the distributions of loads and prices. Adoption increases average load but decreases operating profits with the largest decrease for oil-fired generation (59% when all customers adopt). Consumer surplus and welfare gains are modest (2.5% and 0.24% of the energy bill), and emissions of SO2 and NOx increase but CO2 emissions decrease. Approximately 30% of these efficiency gains could be captured by varying flat rates monthly instead of annually. Monthly flat rate adjustment has many of the same effects as RTP adoption, captures more of the deadweight loss than time of use (TOU) rates, and requires no new metering technology.